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FTC Challenges Consumer Gag Rules

If I run a business and I pressure you to say only nice things about it - or else to say nothing at all - am I engaging in a deceptive trade practice?

You bet I am, especially in an era of ubiquitous online consumer reviews. Fortunately for all of us who look at reviews before choosing a contractor, dry cleaner or landlord, the Federal Trade Commission has taken our side.

In a recent bulletin, law firm Frankfurt Kurnit Klein and Selz described two recent FTC actions challenging so-called gag clauses or non-disparagement provisions designed to prohibit consumers from publishing negative reviews. In the first case, the FTC investigated a real estate firm that had put such a prohibition in tenant leases, threatening hefty damage claims if tenants posted negative comments about the apartment complex online. The commission said it did not pursue an enforcement action because the company removed the clause in question and notified tenants that it had been voided before the FTC became involved.

The more recent, and potentially more serious, action targets Roca Labs, a Florida-based firm that the FTC has accused of suing or threatening to sue customers who disparaged their weight-loss supplements in Internet forums and elsewhere online. Not only did its gag clause allegedly lead to suppression of criticism, but Roca Labs offered substantial discounts in exchange for positive online reviews, according to the FTC.

The deceptive effect of these practices is obvious. It should be self-evident why barring consumers from posting or sharing negative reviews is a deceptive trade practice. Gag clauses are meant to skew the published sample, since only favorable reviews can be published without risk of legal action or financial repercussions. This turns a set of glowing reviews into a lie by omission. Offering financial incentives for positive reviews only upsets the balance even further, making reviews useless to consumers trying to evaluate a product or service.

There is ample precedent for the FTC action. One that is close to home at my firm is the Securities and Exchange Commission’s rule prohibiting investment advisers from publishing testimonials about their services. The rule exists because such testimonials are also deceptive by omission; most advisers would not go out of their way to disseminate bad reviews. The SEC permits reviews on certain third-party sites, such as those appearing on Yelp or Angie’s List, because advisers have no control over which reviews are posted. A complete picture of good and bad feedback alike will be available to a prospective client or other curious parties.

As far as I know, the SEC has not opined directly on non-disparagement clauses such as those under fire from the FTC. I am utterly confident, however, that the commission’s compliance staff would force any adviser or firm that tried to use one to cease immediately. I would have no quarrel with that step.

The law already provides redress via libel and slander actions, which we can view collectively as “defamation” principles, for statements that fall outside the bounds of protected discourse. To be actionable, a statement must be defamatory in the viewpoint of the average audience member. Saying “Larry Elkin is a registered Republican” is not, in the normal course of things, defamatory. However, if Larry Elkin happened to be a Democratic Party officer or chairman, and the speaker made the statement to an audience of Democrats, it might be.

So if the statement does hurt someone’s reputation, the next question is whether the statement is false, since true statements can never be actionable on defamation grounds. (A true statement may be actionable on the grounds of privacy or other issues, but not defamation.) If Larry Elkin actually is a registered Republican, the person who says so is not liable for defamation, regardless of context.

Finally, even if Larry Elkin is not and never has been a registered Republican, the person who says that he is will not be held liable for defamation in this country if Larry Elkin happens to be a public figure or public official (typically the case for a political party officer), unless the false and defamatory statement was made by someone who either knew or should have known that it was false. In other words, the target usually has to prove the statement was made out of malice, not ignorance.

Matters of opinion are not defamatory. “Larry Elkin writes patently stupid things in his blog” is not an actionable statement, because it is purely a matter of opinion. “Larry Elkin is a bad financial planner” is likewise not actionable, which is why some companies are trying to use non-disparagement clauses to prevent exactly such expressions of opinion.

“Larry Elkin flunked the CERTIFIED FINANCIAL PLANNER™ exam” is actionable, at least in my case, because I passed the exam - on the first try - and I continue to hold the right to call myself a CERTIFIED FINANCIAL PLANNER™ professional. If you are wondering about the capital letters, by the way, the CFP Board owns and protects the trademarks related to the designation. CFP® professionals must display their credentials consistently to comply with the Board’s specifications. A theoretical speaker claiming I flunked the exam required to use such marks would lack legal protection, because the speaker’s assertion would be provably false.

The speaker could, however, express deep dissatisfaction with my skill as a financial planner, separate from my credential. I cannot - and should not - take any action against her for doing so. No professional wants to see bad reviews floating around, of course. But paying people to share good opinions, or suing people who share bad ones, is thoroughly deceptive any way you look at it.

I favor the strongest possible protections for freedom of speech, but that freedom never gave businesses the right to lie to current or prospective customers, or to the public at large. A lie by omission is still a lie. In taking aim at these non-disparagement clauses, the FTC is right on target.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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